Keysight Technologies, Inc. (KEYS) Earnings

Management highlights

- **Overall Company Performance**: - Q3 2026 delivered record results that exceeded the high end of prior guidance, with reported orders of $2.091 billion (up 56% year-over-year, 52% core growth), revenue of $1.846 billion (up 36% year-over-year, 31% core growth), and EPS of $3.07 (up 79% year-over-year). - Gross margin hit 69%, operating margin reached 33.2% (up 820 basis points year-over-year, above the long-term 31-32% target range), and free cash flow was $403 million. The company is on track to deliver record annual operating cash flow for fiscal 2026. - **Commercial Communications (Wireline)**: - AI infrastructure scaling drove record orders that more than doubled year-over-year. Growth is supported by four core pillars: AI infrastructure scaling, speed transitions, silicon photonics, and system-level emulation. The company participates across the entire AI innovation lifecycle from pre-silicon design through manufacturing, with deepening strategic engagements with hyperscalers. - Customers across the ecosystem use Keysight solutions for high-speed interconnect characterization, network performance validation, 800G/1.6T optical transceiver scaling, and optical component development. - **Wireless**: - Orders grew significantly on rising next-generation connectivity investment and AI infrastructure supply chain demand. 6G development is expanding beyond traditional higher-speed innovation to three new high-growth areas: AI RAN, Integrated Sensing and Communication (ISAC), and Non-Traditional Networks (NTN), creating expanded end-to-end solution opportunities built on the company's 5G leadership. - **Aerospace Defense and Government**: - Double-digit order growth across all regions driven by global defense modernization. Key growth areas include advanced multi-channel RF solutions for next-generation radar, and Spirent's P&T solutions for jamming/spoofing scenario emulation for autonomous platforms (UAVs, LEO satellites). The company expects a durable multi-year demand cycle supported by record defense budgets. - **Electronic Industrial Solutions Group**: - General electronics growth is led by AI infrastructure investment, with rising test intensity for high-performance components (multilayer PCBs, capacitors) driven by tighter tolerances and higher chip density. - Semiconductor delivered a record quarter driven by capacity expansion for advanced nodes, high bandwidth memory, and accelerating silicon photonics production at leading foundries and IDMs, with strong demand for R&D solutions. - Automotive and energy saw solid double-digit order growth, driven by investment in software-defined vehicle architectures (compliance testing for in-vehicle networks and cybersecurity) and expanding engagements for high-power charging, energy storage, and grid infrastructure validation.

Guidance

- The company raised its outlook for Q4 2026 and full fiscal year 2026, driven by stronger than expected Q3 momentum. - Q4 2026 expected revenue: $1.93 billion to $1.95 billion, representing 37% year-over-year growth at the midpoint. Management expects orders to be slightly up from Q3, consistent with historical seasonality, and to exceed $2 billion for the third consecutive quarter. - Q4 2026 expected EPS: $3.34 to $3.40, representing approximately 76% year-over-year growth at the midpoint. - Full fiscal 2026 is expected to deliver 32% revenue growth and approximately 60% EPS growth at the midpoint. - Management noted a strong setup for fiscal 2027, with an all-time high sales pipeline, growing new customer acquisition, and continued strong demand momentum across core high-growth megatrends. More specific fiscal 2027 guidance will be provided when Q4 2026 results are reported.

Segment performance

1. **Communications Solutions Group (CSG)**: Generated revenue of $1.345 billion, up 43% year-over-year (up 36% core). Gross margin was 70.8% and operating margin was 34%. Within CSG, commercial communications hit its first billion-dollar quarter with revenue up 56% year-over-year, led by 56% growth in wireline; wireline revenue exceeded wireless revenue for the first time this quarter. Aerospace Defense and Government (ADG) within CSG achieved revenue of $339 million, an increase of 14% year-over-year, with double-digit order growth across all regions. 2. **Electronic Industrial Solutions Group (EISG)**: Generated a record $501 million in revenue, an increase of 21% year-over-year, with double-digit order growth across all three sub-markets. Gross margin was 64.1%, and operating margin was 31%. Across the company, software and services now represent approximately 33% of total revenue, while annual recurring revenue makes up 24% of the total revenue mix.

Risks & headwinds

- Supply chain constraints (specifically availability of incoming parts amid broad industry demand) act as a near-term governor on revenue growth, with some backlog expected to shift into fiscal 2027. Product redesign and long-term supply agreements to add second-source capacity are in progress but will take time to implement. - Actual future results may differ materially from forward-looking statements due to existing unidentified risks and uncertainties, which are detailed in the company's recent SEC 10-K and 10-Q filings. - One-time tariff impacts that boosted 2026 profitability will not repeat in future periods.

Analyst Q&A

• Q: How does the 6G market opportunity compare to the prior 5G cycle, and when will material 6G revenue emerge? /

  A: Industry standards are expected to coalesce around 2029, aligned with the traditional sporting event milestone for new wireless generations. While 6G will include the traditional higher speed and new spectrum innovation of past generational upgrades, it also adds three entirely new high-opportunity vectors: AI RAN, ISAC, and NTN. Keysight has already invested heavily across these areas and has an existing solutions portfolio, so management expects the total 6G opportunity to be larger than the 5G opportunity was for the company.

• Q: How meaningful is AI to Keysight's business today, and what is its future growth trajectory? /

  A: AI-related demand is the primary driver of the strong wireline momentum that pushed wireline revenue above wireless this quarter (and year-to-date). Management noted the company is in the early stages of a long AI adoption cycle, and current traction for AI-focused solutions is so strong that it exceeds the company's near-term supply capacity, with a continuously growing pipeline. Over the long term, AI is expected to converge with wireless, automotive, and other Keysight end markets, creating even more opportunity.

• Q: Is the current $2 billion+ quarterly order level sustainable, and how is Keysight positioned to meet high demand? /

  A: Management confirmed the current demand level is sustainable, and expects Q4 orders to surpass $2 billion for the third consecutive quarter. The sales pipeline is at an all-time high, with nearly 3,000 new customers added year-to-date for over $100 million in incremental revenue, and double-digit growth at large core customers. Southeast Asia is the fastest growing region, with business more than doubling year-over-year. The supply chain team has scaled successfully while maintaining strong margins, and the company is actively adding long-term capacity to meet growing demand.

• Q: How has test density grown for AI-related end markets, and what are the incremental margin guardrails going forward? /

  A: Shrinking design margins and requirements for lossless AI performance mean customers can no longer rely on design guarantees alone — they must test extensively in both R&D and production. The shift from monolithic chips to chiplets, growing numbers of high-speed pinouts, and heterogeneous architectures with GPUs/CPUs/DPUs have all created far more test insertion points across the full stack, from signal level testing to protocol and workload emulation. Management expects to continue outperforming the 40% incremental operating leverage target, though 2026 included non-recurring one-time tariff benefits that will not repeat in 2027.